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Revitalize corporate performance, we need a whole new model of strategy.
by Gary Hamel and C.K. Prahalad
Hamel is lecturer in business policy and management at the London Business School. C.K. Prahalad is professor of corporate strategy and international business at the University of Michigan. Their most recent HBR article is Collaborate with Your Competitors and Win January-February 1989). with Yves L Doz.
Today managers in many industries are working hard to match the competitive advantages of their new global rivals. They are moving manufacturing offshore in search of lower labor costs, rationalizing product limes to capture global scale economies, instituting quality circles and just-in-time production, and adopting Japanese human resource practices. When competitiveness still seems out of reach, they form strategic alliances-often with the very companies that upset the competitive balance in the first place. Important as these initiatives are, few of them go beyond mere imitation. Too many companies are expending enormous energy simply to reproduce the cost and quality advantages their global competitors already enjoy. Imitation may be the sincerest form of flatter but it will not lead to competitive revitalization. Strategies based on imitation are transparent to competitors who have already mastered them. Moreover, successful competitors rarely stand still. So it is not surprising that many executives feel trapped in a seemingly endless game of catch-up regularly surprised by the new accomplishments of their rivals. For these executives and their companies, regaining competitiveness will mean rethinking many of the basic concepts of strategy1. As strategy has blossom, the competitiveness of Western companies has withered. This may be coincidence, but we think not. We believe that the application of concepts such as strategic fit (between resources and opportunities), generic strategies (low cost vs. differentiation vs. focus), and the strategy hierarchy (goals strategies, and tactics) have often abetted the process of competitive decline. The new global competitors approach strategy from a perspective that is fundamentally different from that which underpins Western management thought. Against such competitors, marginal adjustments to current orthodoxies are no more likely to produce competitive revitalization than are marginal improvements in operating efficiency. (The insert, Remaking Strategy describes our research and summarizes the two contrasting approaches to strategy we set in large, multinational companies.)
Among the first to apply the concept of strategy to management were H. Igor Ansoff in Corporate Strategy: An Analytic Approach to Business Policy for Growth and Expansion (New York: McGraw-Hill, 1965) and Kenneth R. Andrews in The Concept of Corporate Strategy (Homewood, Ill.: Dow Jones-Irwin, 1971).
Few Western companies have an enviable track record anticipating the moves of new global competitors. Why? The explanation begins with the way most companies have approached competitor analysis. Typically, competitor analysis focuses on the existing resources (human, technical, and financial) of present competitors. The only companies seen as a threat are those with the resources to erode margins and market share in their next planning period. Resourcefulness, the pace at which new competitive advantages are being built, rarely enters in. In this respect, traditional competitor analysis is like a snapshot of a moving car. By itself, the photograph yields little information about the car s speed or direction whether the driver is out for a quiet Sunday drive or warming up for the Grand Prix. Yet many managers have learned through painful experience that a business s initial resource endowment (whether bountiful or meager) is an unreliable predictable of future global success.
8 billon company with a product scope encompassing a broad range of earth-moving equipment. Fox Coca Cola. strategic intent envisions a desired leadership position and establishes the criterion the organization will use to chart its progress. strategic intent is more than simply unfettered ambition. The Apollo program landing a man on the moon ahead of the Soviets was as competitively focused as Komatsu s drive against Caterpillar. strategic intent has been to put a Coke within arm s reach of every consumer in the world. Komatsu was a $2.S. Under. but what none can see is the strategy out of which great victory is evolved. The space program became the scorecard for America s technology race with the USSR.000 years ago: All men can see the tactics whereby I conquer he wrote. motivating people by communicating the value of the target.standing these . Europe and Japan. Yet by 1985. stamina. Honda manufactured almost as many cars worldwide in 1987 as Chrysler. and inventiveness of potential competitors. In the turbulent information technology industry. was scarcely represented outside Japan. On the one hand. our research on global competition. All are expressions of strategic intent.Think back. and semiconductors. industrial robots. it was hard to pick a single competitor as a target. As we tried to unravel the reasons for success and surrender in global markets.) The concept also encompasses an active management process that includes: focusing the organization s attention on the essence of winning. made the point 3. Companies that have risen to global leadership over the past 20 years invariably began with ambitions that were out of ah proportion to their resources and capabilities. Komatsu set out to Encircle Caterpillar. was to acquire the technologies that would put it in the best position to exploit the convergence of computing and telecommunications. But they created an obsession with winning at all levels of the organization and then sustained that obsession over the 10. a Chinese military strategist. few Japanese companies possessed the resource base. We term this obsession strategic intent. Honda was smaller than American Motors and had not yet begun to export can to the United States. it would merely have underlined how dramatic the resource discrepancies between them were. Canon had matched Xerox s global unit market share. Ieaving room for individual and team contributions. Other industry observers foresaw this convergence. Strategic intent captures the essence of wining. Traditional competitor analysis is like a snapshot of a moving car The lesson is clear: assessing the current tactical advantages of known competitors will not help to understand the resolution. and relied on just one product lime small bulldozers for most of its revenue. manufacturing volume. international alliances. Komatsu was less than 35% as large as Caterpillar (measured by sales). or technical prowess of U. In 1970. At the same time. Canon s first halting steps in the reprographics business looked pitifully small compared with the $4 billion Xerox powerhouse. (Many companies possess an ambitious strategic intent yet fail short of their goals. but only NEC made convergence the guiding theme for subsequent strategic decisions by adopting computing and communications as its intent. and multinational management has brought us into close contact with senior managers in America.to 20-year quest for global leadership. Remaking Strategy Over the last ten years. Canon sought to Beat Xerox Honda strove to become a second Ford an automotive pioneer. so NEC s strategic intent. set in the early 1970s. we became more and more suspicious that executives in Western and Far Eastern companies often operated with very different conceptions of competitive strategy. If Western managers had extended their competit or analysis to include these companies. sustaining enthusiasm by providing new operational definitions as circumstances change and using intent consistently to guide resource allocations. Sun-Tzu. and European industry leaders.
One. We searched for evidence of divergent views of strategy. Both models recognize that relative competitive. Both models recognize the problem of competing in a hostile environment with limited resources. The first emphasizes the search for advantages that are inherently sustainable. of the role of top management. seemingly unattainable goals. Two contrasting models of strategy emerged. the emphasis in the second is on leveraging resources to reach. top management works to assure that the plans of individual strategic units don t undermine future developments by default. Business-functional consistency comes from allegiance to intermediate-term goals. consistency between corporate and business levels is largely a mater of conforming to financial objectives. The first seeks to reduce financial risk by building a balanced portfolio of cash-generating and cash-consuming businesses. Strategic intent provides consistency to short-term action. we thought. might help explain the conduct and outcome of competitive battles as well as supplement traditional explanations for Japan s ascendance and the West s decline. But while the first leads to a search fort niches (or simply dissuades the company from challenging an entrenched competitor). Both models recognize the need to disaggregate the organization in a way to allows top management to differentiate among the investment needs of various planning units.differences. advantage determines relative profitability. resources are allocated to product-market units in which relatedness is defined by common products. But while the emphasis in the first is on trimming ambitions to match available resources. By tracking these investments across businesses. In battles for global leadership. competitive advantage. centers on the problem of leveraging resources. the second emphasizes the need to accelerate organizational learning to outpace competitors in building new advantages. channels and customers. In the first. Both models recognize the difficulty of competing against larger competitors. business-corporate consistency comes from allegiance to a particular strategic intent. Strategic intent is stable over time. the second produces a quest for new rules that can devalue the incumbent advantages. Then we built detailed histories of selected competitive battles. . one of the most critical tasks is to lengthen the organization s attention span. Both models recognize that balance in the scope of an organization s activities reduce the risk. In the first model. In the second model. defining the served market. investments are made in core competences (microprocessor controls or electronic imaging for example) as well as in product-market units. of challenges. with lower level employees encouraged to invent how those goals will be achieved. adhering to accepted industry practices. Each business is assumed to own all the critical skills it needs to execute its strategy successfully. while leaving room for reinterpretation as new opportunities emerge. which most Western managers will recognize. The two are not mutually exclusive but they represent a significant difference to emphasis-an emphasis than deeply affects the competitive battles get played out over time. In the second. The second seeks to reduce competitive risk by ensuring a well-balanced and efficiently broad portfolio advantages. We began by mapping the implicit strategy models of managers who had participated in our research. Both models recognize the need for consistency action across organizational level. Consistency between business and functional levels comes by tightly restricting the means the business uses to achieve its strategy establishing standard operating procedures.
pour in some money. Here the value added of top management is low indeed. Strategies are accepted or rejected on the basis of whether managers can be precise about the how as well as the what of their plans. When Caterpillar threatened Komatsu in Japan. Many companies are more familiar with strategic planning than they are with strategic intent. Although strategic planning is billed as a way of becoming more future oriented. most managers. goals that cannot be planned for fail by the wayside. and belief in accepted . Just as you cannot plan a 10. the planning format.to 20-year quest for global leadership. But the two goals do not have the same motivational impact. will admit that their strategic plans reveal more about today s problems than tomorrow s opportunities. and hope that something wonderful will happen. encircling Caterpillar encompassed a succession of medium-term programs aimed at exploiting specific weaknesses in Caterpillar or building particular competitive advantages product. Komatsu responded by first improving quality. So plans do little more than project the present forward incrementally. when pressed. worldwide. let alone blue-collar employees. And with the pace of change accelerating in most industries. On the other. But mightn t they feel different given the challenge to Beat Benz the rallying cry at one Japanese auto producer? Strategic intent gives employees the only goal that is worthy of commitment: to unseat the best or remain the best.2 On the one hand. the only role for top managers is to retrofit their corporate strategy to the entrepreneurial successes that emerge from below. Are the milestones clear? Do we have the necessary skills and resources? How will competitors react? Has die market been thoroughly researched? In one form or another. The planning process typically acts as a feasibility sieve. But can you plan for global leadership? Did Komatsu. With a fresh set of problems confronting managers at the beginning of every planning cycle. As tests of strategic fit become more stringent. the predictive horizon is becoming shorter and shorter. We don t believe that global Ieadership comes from an undirected process of intrapreneurship. To this Silicon Valley approach to innovation. definition of served market. Strategic intent sets a target that deserves personal effort and commitment. It is hard to imagine middle managers. We know of few companies with highly developed planning systems that have managed to set a strategic intent. then cultivating export markets.At Komatsu. and Honda have detailed. the chance of falling into a leadership position by accident is also remote. Sadly. Nor is it the product of a skunkworks or other techniques for internal venturing. top management is more likely to talk in terms of global market leadership. Ask the chairmen of many American corporations how they measure their contributions to their companies success and you re likely to get an answer expressed in terms of shareholder wealth. 20-year strategies for attacking Western markets? Are Japanese and Korean managers better planners than their Western counterparts? No. focus often shifts dramatically from year to year. to be sure. reward criteria. global leadership is an objective that lies outside the range of planning. and then underwriting new development. top management lacks any particular point of view about desirable ends beyond satisfying shareholders and keeping raiders at bay. the admonition Be realistic is given to line managers at almost every turn. In a company that possesses a strategic intent. waking up each day with the sole thought of creating more shareholder wealth. then driving down costs. The important question is not How will next year be different from this year? but What must we do differently next year to get closer to our strategic intent? Only with a carefully articulated and adhered to strategic intent will a succession of year-on-year plans sum up co global leadership. Yet companies that are afraid to commit to goals that lie outside the range of planning are unlikely to become global leaders. As valuable as strategic planning is. Market share leadership typically yields shareholder wealth. this view of innovation may be consistent with the reality in many large companies. Canon. Behind such programs lies a nihilistic assumption: the organization is so hide-bound or orthodox ridden that the only way to innovate is to put a few bright people in a dark room. The goal of strategic intent is to fold the future back into the present.
top management is specific about the ends (reducing product development times by 75%. strategic intent is like a marathon run in 400-meter sprints. challenges stretch the organization. Building Competitive Advantage at Komatsu. innovation is necessarily an isolated activity. then licensing its own technology to other manufacturers to fund further R&D. Canon set its engineers a target price of $ 1. and so on. While strategic intent is clear about ends. The exhibit.industry practice all work together to tightly constrain the range of available means. To preempt Xerox in the personal copier business. A Process Model to internal Corporate Venturing in the Diversified Major Firm Administrative Science Quarterly. management did this by presenting the organization with a series of corporate challenges. Middle managers must do more than deliver on promised financial targets. Creativity is unbridled. But this creativity comes in the service of a clearly prescribed end. Achieving strategic intent requires enormous creativity with respect to means: witness Fujitsu s use of strategic alliances in Europe to attack IBM. June 1983. so the role of top management is to focus the organization s attention on the ground to be covered in the next 400 meters. for example) but less prescriptive about the means. At the time. No one knows what the terrain will look like at mille 26. Together these reveal potential competitive openings -and identify the new skills the organization will need to take the initiative away from better positioned players. the next entry into new markets. Planners ask How will next year be different? Winners ask What must we do differently? Growth depends more on the inventive capacity of individuals and small teams than on the ability of top management to aggregate the efforts of multiple teams towards an ambitious strategic intent. One year the challenge might be quality. As this example indicates. a way to identify the focal point for employees efforts in the near to medium term. In several companies. they must also deliver on the broad direction implicit in their organization s strategic intent. Canon s least expensive copier sold for several thousand dollars. to make the most of limited resources. . then entering market segments in Japan and Europe where Xerox was weak. 2. corporate challenges are a way to stage the acquisition of new competitive advantages. each specifying the next hill in the race to achieve strategic intent. In companies that overcame resource constraints co build leadership positions. illustrates the way challenges helped that company achieve its intent. Robert A. it is flexible as to means it leaves room for improvisation. because top management establishes the criterion against which employees can pretest the logic of their initiatives. As with strategic intent. Like strategic intent. Instead. In this respect.000 for a home copier. Corporate challenges come from analyzing competitors as well as from the foreseeable pattern of industry evolution. Top management then challenges the organization to close the gap by systematically building new advantages. This forces the organization to be more inventive. Burgelman. then gearing up internal R&D efforts. Current capabilities and resources will not suffice. the next total customer care. For Canon this meant first understanding Xerox s patents. Whereas the traditional view of strategy focuses on the degree of fit between existing resources and current opportunities. Trying to reduce the cost of existing models would not have given Canon the radical priceperformance improvement it needed to delay ay deter Xerox s entry into personal copiers. Canon engineers were challenged to reinvent tic copier a challenge they met by substituting a disposable cartridge for the complex image-transfer mechanism used in older copiers. but not uncorralled. Strategic intent implies a sizable stretch for an organization. then licensing technology to create a product that would yield early market experience. we see a different relationship between means and ends. the next a rejuvenated product line. strategic intent creates an extreme misfit between resources and ambitions. As a result.
Contrast this situation with what happened at Nissan when the yen strengthened: top management took a big pay cut and then asked middle managers and lime employees to sacrifice relatively less. or quasi crisis. Establish clear milestones and review mechanisms to track progress and ensure that internal recognition and rewards reinforce desired behavior. You can imagine how eager the U. In each case. In too many companies. The goal is to make the challenge inescapable for everyone in the company. Develop a competitor focus at every level through widespread use of competitive intelligence. This one-sided approach to regaining competitiveness keeps many companies from harnessing the intellectual horsepower of their employees.For a challenge to be effective. instead of allowing inaction to precipitate a real crisis. It is important to distinguish between the process of managing corporate challenges and the advantages that the process creates. Every employee should be able to benchmark his or her efforts against best-in-class competitors so that the challenge becomes personal. pour in money.S. Ford showed production-line workers videotapes of operations at Mazda s most efficient plant. for example. and team building. However. 1980). For example. the pain of revitalization falls almost exclusively on the employees least responsible for the enterprise s decline. Creating a sense of reciprocal responsibility is crucial because competitiveness ultimately depends on the pace at which a company embeds new advantages deep within its organization. or something else there is the same need to engage employees intellectually and emotionally in the development of new skills. individuals and teams throughout the organization must understand it and see its implications for their own jobs. value engineering.S. middle managers often try to protect their people from the whipsaw of shifting priorities. cost. for example. Too often. budgeted on the basis of worst case exchange rates that overvalued the yen. Whatever the actual challenge may be quality. The result was a long strike and. and hope. The company thus succeeded in demoralizing its entire blue-collar work force for the sake of a 1. But this wait and see if they re serious this time attitude ultimately destroys the credibility of corporate challenges. or an ability to influence the direction of the business. management had sought a 40% wage-package concession from hourly employees to bring labor costs into line with Far Eastern competitors. Companies that set corporate challenges to create new competitive advantages (as Ford and IBM did with quality improvement) quickly discover that engaging the entire organization requires top management to: Create a sense of urgency. a 10% wage concession from employees on the lime. ultimately. workers are asked to commit to corporate goals without any matching commitment from top management be it employment security gain sharing.) Provide employees with the skills they need to work effectively training in statistical tools. Thus we need to expand the concept of competitive advantage beyond the scorecard many managers now use: Are my costs lower? Will my product command a price premium? .5% reduction in total costs. company. (For example. Reciprocal responsibility means shared gain and shared pain. value engineering. for example. We believe workers in many companies have been asked to take a disproportionate share of the blame for competitive failure. problem solving. see Michael E. In one U. direct labor costs iii manufacturing accounted for less than 15% of total value added. Ironically. further analysis showed that their competitors most significant cost savings carne not from lower hourly wages but from better work methods invented by employees. by amplifying weak signals in the environment that point up the need to improve. (Komatsu. not on its stock of advantages at any given time. Give the organization time to digest one challenge before launching another. the challenge will take root only if senior executives and lower level employees feel a reciprocal responsibility for competitiveness. workers were to make similar contributions after the strike and concessions. Porter Competitive Strategy (New York: Free Press.) The Silicon VaIIey approach to innovation: put a few bright people in a dark room. When competing initiatives overload the organization.
The wider a company s portfolio of advantages. a company that built capacity ahead of competitors. Toshiba. better financed competitors. Japan had become the largest producer of black-and-white television sets. What some call competitive suicide pursuing both cost and differentiation is exactly . changing the terms of engagement. they have been investing in regional manufacturing and design centers to tailor their products more closely to national markets. Hitachi. As Western manufacturers began to move production offshore. At the same time. process and product technology exchange rates.S. These manufacturers thought of the various sources of competitive advantage as mutually desirable layers. Japanese companies accelerated their investment in process technology and created scale and quality advantages. Sharp. Uncovering a new competitive advantage is a bit like getting a hot tip on a stock: the first person to act on the insight makes more money than the last. But there is no more undervalued market share when catch of 20 semiconductor companies builds enough capacity to serve 10% of the world market. a global franchise. The moral? An organization s capacity to improve existing skills and learn new ones is the most defensible competitive advantage of all. they recognized that these cost-based advantages were vulnerable to changes in labor costs. Four approaches to competitive innovation are evident in the global expansion of Japanese companies. By 1970. Keeping score of existing advantages is not the same as building new advantages. primarily. and competing through collaboration. Komatsu set its budgets on the basis of an even stronger yen. the goal is not competitive imitation but competitive innovation. Japanese producers relied on labor and capital cost advantages. For smart competitors. they added another string to their bow by accelerating the rate of product development. This investment gave them additional layers of advantage quality and reliability as well as further cost reductions from process improvements. and trade policy. they also invested heavily in building channels and brands. Sanyo had established related sets of businesses that could support global marketing investments. Then they built global brands. they enlarged the scope of their products and businesses to amortize these grand investments. and European competitors rationalized manufacturing. Then they deskilled competitors through alliances and outsourcing deals. To keep the pressure on. Japanese manufacturers used their competitive advantage at that time. the art of containing competitive risks within manageable proportions. thus creating another layer of advantage. searching for those bricks. The essence of strategy lies in creating tomorrow s competitive advantages faster than competitors mimic the ones you possess today. More recently. By 1967. Instead. Managers cannot do that simply by playing the same game better making marginal improvements to competitors technology and business practices. and by 1980 ah the major players Matsushita. In the late 1970s. low labor costs to build a base in the private label business. In the 1960s. dropped prices to fill plants. So throughout the 1970s. Then as their U. That means carefully managing competitive engagements so that scarce resources are conserved. and reduced costs as volume rose went to the bank. The Japanese color television industry illustrates this layering process. it was closing the gap in color televisions. not mutually exclusive choices. then moved quickly to establish world-scale plants. a company must usually take on larger. The first mover traded on the fact that competitors undervalued market share they didn t price to capture additional share because they didn t understand how market share leadership could be translated into lower costs and better margins. the less risk it faces in competitive battles.Few competitive advantages are long lasting. They have moved inexorably from less defensible advantages such as bow wage costs to more defensible advantages like global brands. To achieve a strategic intent. When the experience curve was young. These are: building layers of advantage. they must fundamentally change the game in ways that disadvantage incumbents devising novel approaches to market entry advantage building and competitive warfare. New global competitors have built such portfolios by steadily expanding their arsenals of competitive weapons.
it could build a base of operations in underdefended territory and then use that base to launch an expanded attack. Honda was building a core competence in engines. they are moving away from standardized world products to products like Mazda s mini-van.S. successful new competitors work to stay below the response threshold of their larger. but they ve just made me a great offer to supply components In each country. For example. while Kodak remains a distant second in the large copier market that Xerox still dominates. During the 1970s. managers must have few orthodoxies about how to break into a market or challenge a competitor. rivals saw on 50 cc motorcycles. Changing the terms of engagement refusing to accept the front runner s definition of industry and segment boundaries represents still another form of competitive innovation. it was already racing larger bikes in Europe assembling the design skills and technology it would need for a systematic expansion across the entire spectrum of motor-related businesses. When Honda took on leaders in the motorcycle industry for example. companies must extend their peripheral vision by tracking and anticipating the migration of global competitors across product segments. multinational. The search for those bricks begins with a careful analysis of the competitor s conventional wisdom: How does the company define its served market ? What activities are most profitable? Which geographic markets are too troublesome to enter? The objective is not to find a corner of the industry (or niche) where larger competitors seldom tread but to build a base of attack just outside the market territory that industry leaders currently occupy. . The goal is an uncontested profit sanctuary which could be a particular product segment (the low end in motorcycles). their Japanese competitor had found a different those brick. Another approach to competitive innovation searching for loose bricks exploits the benefits of surprise. As a result. Another colleague told still another story. national markets. Canon s entry into the copier business illustrates this approach. generators.what many competitors striving for. which is just as useful in business battles as it is in war. Particularly in the early stages of a war for global markets. the threat of Honda s horizontal diversification went unnoticed. value-added stages. but they have some exciting stuff at the top end. products. To find those bricks. it began with products that were just outside the conventional definition of the leaders product-market domains. We really should reverse engineer that thing . we asked several country managers to describe what a Japanese competitor was doing in the local market. more powerful rivals. a slice of the value chain (components in the computer industry).3 Using flexible manufacturing technologies and better marketing intelligence. lawn mowers. or a particular geographic mark et (Eastern Europe). They haven t taken any business away from me he said. Xerox had no trouble decoding the new entrants intentions and developing countermoves. in one large U. market. and pricing. They re coming at us in the low end. What many competitors failed to see was Honda s strategic intent and its growing competence in engines and power trains. and distribution channels. Its U. Yet even as Honda was selling 5Occ motorcycles in the United States. Honda s progress in creating a core competence in engines should have warned competitors that it might enter a series of seemingly unrelated industries automobiles. businesses. distribution.S. But with each company fixated on its own market. service. As a result. IBM eventually withdrew from the copier business. developed in California expressly for the U. marine engines. both Kodak and IBM tried to match Xerox s business system in terms of segmentation.S. Japanese companies always come in at the bottom The second speaker found the comment interesting but disagreed: They don t offer any low-end products in my market. The first executive said. Today companies like Matsushita and Toshiba are similarly poised to move in unexpected ways across industry boundaries. In protecting those bricks. Staking out under defended territory is one way to do this.
Telefunken (in Germany). In fighting larger global rivals by proxy Japanese companies have adopted a maxim as old as human conflict itself: my enemy s enemy is my friend. camcorders. But Canon dramatically reduced the barriers to entry by changing the rules of the game. Confronted with the need to rethink its business strategy and organization. Fujitsu s alliances in Europe with Siemens and STC (Britain s largest computer maker) and in the United States with Amdahl yield manufacturing volume and access to Western markets. Competitive innovation is like judo: upset your rivals by using their size against them. and Thomson (in France). changed the terms of competitive engagement. Through licensing. Japanese competitors attacked traditional businesses like TVs and hi-fis while volunteering to manufacture next generation product like VCRs. They can also learn how GM and Ford compete when they will fight and when they won t. At each stage. Hijacking the development efforts of potential rivals is another goal of competitive collaboration. Canon chose to distribute through office-product dealers rather than try to match Xerox s huge direct sales force. Canon copiers were sold rather than leased. In this sense. and joint ventures. and technology. But companies that abandoned their own development efforts seldom reemerged as serious competitors in subsequent new product battles.S. the reverse is also true: Ford and GM have an equal opportunity to learn from their partner-competitors. and compact disc players for Western rivals. Finally. quality.Canon. and improved reliability. the faster they would erode the company s traditional profit base. and its reliance on service revenues instead became barriers to retaliation. Competitors that tried to match Xerox s business system had to pay the same entry costs the barriers to imitation were high. Toyota s joint venture with GM. Collaboration can also be used to calibrate competitors strengths and weaknesses. which allowed it to quickly multiply the forces arrayed against Philips in the battle for leadership in the European VCR business. on the other hand. Matsushita established a joint venture with Thorn (in the United Kingdom). That s why the most effective weapon new competitors possess is probably a clean sheet of paper. In the early 1980s. and in most cases that is precisely what happened. It also avoided the need to create a national service network by designing reliability and service ability into its product and then delegating service responsibility to the dealers. freeing Canon from the burden of financing the lease base. And why an incumbent s greatest vulnerability is its belief in accepted practice. competitive innovation is like judo: the goal is to use a larger competitor s weight against it. While Xerox built a wide range of copiers. Competitive innovation works on the premise that a successful competitor is likely to be wedded to a recipe for success. In the consumer electronics war. Xerox was paralyzed for a time. They hoped their rivals would ratchet down development spending. developed new channels. Canon appealed to secretaries and department managers who wanted distributed copying. give these automakers an invaluable vantage point for assessing the progress their U. Of course. Canon s experience suggests that there is an important distinction between barriers to entry and barriers to imitation. and-Mazda s with Ford. rivals have made in cost reduction. instead of selling to the heads of corporate duplicating departments. What might have been seen as critical success factors Xerox s national sales force and service network. Xerox managers realized that the faster they downsized the product line. outsourcing agreements. Canon neatly sidestepped a potential barrier to entry. . it is sometimes possible to win without fighting. Changing the rules also short-circuited Xerox s ability to retaliate quickly against its new rival. For example. its large installed base of leased machines. Canon standardized machines and components to reduce costs. And that happens not by matching the leader s capabilities but by developing contrasting capabilities of one s own.
S. Surrender wan not inevitable. Adding to the competitive surprise was the fact that the new entrants typically attacked the periphery of market (Honda in small motorcycles. companies lost battles and came to see surrender as inevitable. Porsche has now announced that it will no longer make entry level cars. Yamaha in grand pianos. extensive corporate advertising) were ignored or dismissed as quirky. Western managers often misinterpreted the rival s tactics. This consistency in the long term. Seldom was the full extent of the competitive threat appreciated the multiple layers of advantage the expansion across related product segments. how did U. Finally. and inventiveness and involvement in the short term provide the key to leveraging limited resources in pursuit of ambitious goals. Few companies recognize the value of documenting failure. Given their technological leadership and access to large regional markets. Not possessing long-term competitor-focused goals themselves. Imitating the current visible tactics of rivals put Western businesses into a perpetual catch-up trap. They also calculated the threat posed by potential competitors in terms of their existing resources rather than their resourcefulness. In terms of brand share that s nearly true. and European companies lose their apparent birthright to dominate global industries? There is no simple answer. a pattern of competitive attack and retrenchment that was remarkably similar across Industries. This lead to systematic under estimation of smaller rivals who were fast gaining technology through licensing arrangements acquiring market understanding from downstream OEM partners. They believed that Japanese and Korean companies were competing solely to the basis of cost and quality. but the attack was staged in a way that distinguished ultimate intentions and sidestepped direct confrontation. so there is a process of surrender. use of nontraditional channels. But we believe there is a pathology of surrender (summarized in The Process of Surrender ) that gives some important clues. competitive innovation helps reduce competitive risk in the short term. seeing them as part of a niche strategy and not as a search for those bricks. We call this the process of surrender.The route to competitive revitalization we have been mapping implies a new view of strategy. It is not very comforting to think that the essence of Western strategic thought can be reduced to eight rules for excellence. The process started with unseen intent. Strategic intent assures consistency in resource allocation over the long term. Clearly articulated corporate challenges focus the efforts of individuals in the medium term. managers We : spoke with said Japanese companies position in the European computer industry was non existent. These typically produce a partial response to those competitors initiatives: moving manufacturing offshore. and innumerable two-by-two matrices. Oblivious of the strategic intent and intangible advantages of their rivals. American and European businesses were caught off guard.4 . and improving product quality and manufacturing productivity through company wide employee involvement programs. Similarly German auto producers claimed to feel unconcerned over the proclivity of Japanese producers to go up market but with its low-end models under tremendous pressure from Japanese producers. The Process of Surrender In the battles for global leadership that have taken place during the last two decades we have seen. five competitive forces. three generic strategies. of course. For example. seven S s. Toshiba in small black and white televisions) before going headto-head with incumbents. but the Japanese control as much as one-third of the manufacturing value added to the hardware sales of European-based computer businesses. focus in the medium term. One by one. Fewer still search their own managerial orthodoxies for the seeds for competitive surrender. Incumbents often misread these attacks. four product life-cycle stages. Revitalization requires understanding that process too. outsourcing or instituting a quality programs. the development of global brands positions. But just as there is a process of winning. Unconventional market entry strategies (minority holdings in less developed countries. Western companies did not ascribe such intentions to their rivals.
Asked in the piano business was mature. camcorders. distracted by opportunities in more attractive industries nice mainframe computers. Concepts like mature and declining are largely definitional. harvest. Ironically. But current industry structure reflects the strengths of the industry leader. Few force managers to consider global opportunities and threats. despite the fact that other manufacturers long ago abandoned these businesses as mature. Too often strategy is seen as a positioning exercise in which options are tested by how they fit the existing industry structure. and generic strategies often have toxic side effects: They reduce the number of strategic options management is willing to consider. and playing by the leader s rules is usually competitive suicide. In the short term. hold. What could possibly top the color TV? They asked themselves. Strategy recipes limit opportunities for competitive innovation. once thought mature. Moreover. Schendel. often with dubious empirical bases. Most of the tools of strategic analysis are focused domestically. the value chain. What most executives mean when they label a business mature is that sales growth has stagnated in their current geographic markets for existing products sold through existing channels. so long as they can think outside traditional industry boundaries. the company attempts to abandon them and enter others in which the forces of global competition are not yet so strong. but there are fewer and fewer businesses in which a domestic-oriented company can find refuge. We seldom hear such companies asking: Can we move into emerging markets overseas ahead of our global rivals and prolong the profitability of this business? Can we counterattack in our global competitors home markets and slow the pace of their expansion? A senior executive in one successful global company made a telling comment: We re glad to find a competitor managing by the . competitor benchmarking. But while they have been busy map making their competitors have been moving entire continents. Yet for the past 20 years. Strategy Formulation: Analytical Concepts (St.S. we re not in the piano business. A $20 billion-a-year business will be created when high definition television is launched in the United States. Hofer and Dan E. product portfolios. For example. The result is predictable: as businesses come under attack from foreign competitor. Map-making skills are worth little in the epicenter of an earthquake. And anyway. Minn.Strategic framework for resource allocation its diversified companies are summarized in Charles W. space that is off the map. Playing by the industry leader s rules is Competitive suicide. we re in the keyboard business? Year after year Sony has revitalized its radio and tape recorder businesses. Armed with concepts like segmentation. but the executives conception of the industry. A company may have 40 businesses and only four strategies invest. is on the verge of a dramatic renaissance. They yield predictable strategies that rivals easily decode. and globalization have undermined the value of traditional industry analysis. it s not the industry that is mature. experience curve. and compact disc players. even reasonable concepts like the product life cycle. and mobility barriers. many managers have become better and better at drawing industry maps. A narrow concept of maturity can foreclose a company from a broad stream of future opportunities.: West Publishing. left Japanese producers with a virtual monopoly in VCRs. and laundry lists. the TV business. several U. advances in strategy have taken the form of ever more typologies. RCA and GE. this may be an appropriate response to waning competitiveness. Paul. heuristics. strategic groups. companies thought that consumer electronics had become a mature industry. rapidly changing technology deregulation. This is particularly true now that industry boundaries are becoming more and more unstable. The strategist s goal is not to find a niche within the existing industry space but to create new space that is uniquely suited to the company s own strengths. Only if we can t take any market share from anybody anywhere in the world and still make money. But the pioneers of television may capture only a small pan of this bonanza. a senior executive in Yamaha replied. In the 1970s. 1978). In such cases. 4. They create a preference for selling businesses rather than defending them. portfolio planning portrays top management s investment options as an array of businesses rather than as an array of geographic markets. or divest. In industries such as financial services and communications. But an industry in upheaval presents opportunities for ambitious companies to redraw the map in their favor.
Unfortunately. Fujitsu. that often leads to denominator management because executives soon discover that reductions in investment and head count the denominator improve the financial ratios by which they are measured more easily than growth in the numerator revenues. Panasonic (Matsushita). Yet Japanese companies have created a score or more NEC. such as strategic business units and the decentralization an SBU structure implies. they . Canon. In many companies. In many of its businesses. business unit managers are rewarded solely on the basis of their performance against return on investment targets. Few companies with a strong SBU orientation have built successful global distribution and brand positions. Seiko. To make matters worse. some once-strong GE businesses opted out of the difficult task of building a global brand position. among them. La contrast. company in the last ten years? We believe that inflexible SBU-type organizations have also contributed to the deskilling of some companies. Lacking this mortar. and Kodak. It also fosters a hair-trigger sensitivity to industry downturns that can be very costly. and Honda. For an SBU defined in product market terms. Daewoo. Toshiba. GE made no coordinated effort to build a global corporate franchise. Siemens. Not surprisingly. The underlying principle is simple: economies of scope may be as important as economies of scale in entering global markets. internal accounting data may not reflect the competitive value of retaining control over core competence. But capturing economies of scope demands inter-business coordination that only top management can provide. Where upstream component manufacturing activities are seen as cost centers with cost-plus transfer pricing. Investments in a global brand franchise typically transcend the resources and risk propensity of a single business. Last in decentralization s list of dangers is the standard of managerial performance typically used in SBU organizations. Managers who are quick to reduce investment and dismiss workers find it takes much longer to regain lost skills and catch up on investment when the industry turns upward again. Sony. Any GE business with international ambitions had to bear the burden of establishing its credibility and credentials in the new market alone. Such competitors can co-opt domestically oriented companies into long-term sourcing dependence and capture the economies of scope of global brand investment through interbusiness coordination. Minolta.S. a company s businesses are truly loose bricks easily knocked out by global competitors that steadily invest in core competences. While some Western companies have had global brand positions for 30 or 40 years or more (Heinz. competitive revitalization requires positive value added from top management. As a result. Each business is assumed to have all the resources it needs to execute its strategies successfully. General Electric s situation is typical. Can you name one global brand developed by a U. it is hard to identify any American or European company that has created a new global brand franchise in the last 10 to 15 years. But that gives an SBU manager little incentive to distinguish between external sourcing that achieves product embodied competitiveness and internal development that yields deeply embedded organizational competences that can be exploited across multiple businesses. Epson. For a single SBU. this American giant has been almost unknown in Europe and Asia. IBM. Together a shared global corporate brand franchise and shared core competence act as mortar in many Japanese companies. the only way to remain competitive is to purchase key components from potential (often Japanese or Korean) competitors. smaller Korean companies like Samsung.portfolio concept sell list we can almost predict how much share we ll have to take away to put the business on the CEO s Companies can also be overcommitted to organizational recipes. or combustion engines. it is hard for top management to fail. But desirable as clear lines of responsibility and accountability are. Ford. for example). Decentralization is seductive because it places the responsibility for success or failure squarely on the shoulders of line managers. competitiveness means offering an end product that is competitive in price and performance. and Lucky Gold Star are busy building global-brand umbrellas that will ease market entry for a whole range of businesses. and in this no-excuses environment. optical media. additional investment in the core activity may seem a less profitable use of capital than investment in downstream activities. incapable of sustaining investment iii a core competence such as semiconductors.
discussions gravitate to the numbers: while the value added of managers is limited to the financial and planning savvy they carry from job to job. Middle managers buffeted by circumstances that seem to be beyond their control desperately want to believe that top management has all the answers. Managers move so many times as part of their career development that they often do not understand the nuances of the businesses they are managing. the only time the work force heard about the company s competitiveness problems was during wage negotiations when problems were used to extract concessions. competitors strategies. see Peter Lorange and Richard F. who were extremely anxious because top management wasn t talking openly about the competitive challenges the company faced. Knowledge of the company s internal planning and accounting systems substitutes for substantive knowledge of the business. They assumed the lack of communication indicated a lack of awareness on their senior managers part. top management evaluates line managers on numbers alone because no other basis for dialogue exists. Bur the strategy hierarchy undermines competitiveness by fostering an elitist view of management that tends to disenfranchise most of the organization. For example. The myths that grow up around successful top managers Lee Iacocca saved Chrysler De Benedetti rescued Olivetti: John Sculley turned Apple around perpetuate it. and global opportunities substantively. Particularly in industries where there is fierce competition for the best people and where competitors invest relentlessly.to three-year time frame. for example.to four-year horizon on the effort simply invites disaster. That is one . In this hierarchy. Invariably. in turn. Either the manager does not commit to goals whose time line extends beyond his or her expected tenure. hesitates to admit it does not for fear of demoralizing lower level employees. Strategic Planning Systems (Englewood Cliffs. Regardless of ability and effort. The organization becomes overloaded with initiatives. a threat that everyone perceives but no one talks about creates more anxiety than a threat that has been clearly identified and made the focal point for the problem-solving efforts of the entire company. the people below them could not. Business schools are guilty here because they have perpetuated the notion that a manager with net present value calculations in one hand and portfolio planning in the other can manage any business anywhere. And top management. but imposing a three. Aiming to be number one in a business is the essence of strategic intent. 1977). of course. 5. Or ambitious goals are adopted and squeezed into an unrealistic ally short time frame. denominator management creates a retrenchment ratchet. they feel great pressure to create a good track record fast. Unfortunately. fast-track managers are unlikely to develop the deep business knowledge they need to discuss technology options. Indeed. We interviewed business unit managers in one company. these same managers replied that while they could face up to the problems. So does the turbulent business environment. His series of quick successes finally came to an end when he confronted a Japanese competitor whose managers had been plodding along in the same business for more than a decade. Acquisitions are made with little attention to the problems of integration. for example. NJ. Almost every strategic management theory and nearly every corporate planning system is premised on a strategy hierarchy in which corporate goals guide business unit strategies and business unit strategies guide functional tactics5. senior management makes strategy and lower levels execute it. making competitive innovation unlikely. The strategy hierarchy isn t the only explanation for an elitist view of management.: Prentice-HaII. This pressure often takes one of two forms. Employees fail to identify with corporate goals or involve themselves deeply in the work of becoming more competitive. The concept of the general manager as a movable peg reinforces the problem of denominator management. The result of all this is often a code of silence in which the full extent of a company s competitiveness problem is not widely shared.lose market share in every business cycle. Collaborative ventures are formed without adequate attention to competitive consequences. therefore. At GE. When managers know that their assignments have a two. Vancil. one fast-track manager heading an important new venture had moved across five businesses in five years. But when asked whether they were open with their own employees. In many diversified companies. The dichotomy between formulation and implementation is familiar and widely accepted.
lacked the courage to commit their companies to heroic goals goals that lay beyond the reach of planning and existing resources. we invariably found senior managers who. It may be the astronauts who get all the glory. even though the real opportunities may be elsewhere. they need the intelligence that s back on the ground. Investors aren t hopelessly short term. The need for upward communication is often ignored. Difficulties in embedding new capabilities are typically put down to communication problems. they re justifiably skeptical. The goal of the strategy hierarchy remains valid to ensure consistency up and down the organization. the stock market held the company to an 8:1 price/earnings ratio. or assumed to mean nothing more than feed back. In the 1990s.reason honesty and humility on the part of top management may be the first prerequisite of revitalization. Of course the market s message was clear: We don t trust you. for whatever reason. For one thing. But we believe that in most cases investors socalled short-term orientation simply reflects their lack of confidence in the ability of senior managers to conceive and deliver stretch goals. . there are not enough heads and points of view in divisional or corporate planning departments to challenge conventional wisdom. Programs such as quality circles and total customer service often fail short of expectations because management does not recognize that successful implementation requires more than administrative structures. the challenge will be to enfranchise employees to invent the means to accomplish ambitious ends. The chairman of one company complained bitterly that even after improving return on capital employed to over 40% (by ruthlessly divesting lackluster businesses and downsizing others). But this consistency is better derived from a clearly articulated strategic intent than from inflexibly applied top-down plans. You ve shown no ability to achieve profitable growth. but everyone knows that the real intelligence behind the mission is located firmly on the ground. Top managers are like astronauts to perform well. For another. The impetus for Canon s pioneering entry into the personal copier business came from an overseas sales subsidiary not from planners in Japan. but because they have developed ways to harness the wisdom of the anthill They realize that top managers are a bit like the astronauts who circle the earth in the space shuttle. Just cut out the slack. In contrast. The starting point for next year s strategy is almost always this year s strategy. We seldom found cautious administrators among the top managements of companies that came from behind to challenge incumbents for global leadership. They re justifiably skeptical of top management. manage the denominators. The company sticks to the segments and territories it knows. Where strategy formulation is an elitist activity it is also difficult to produce truly creative strategies. Another reason is the need to make participation more than a buzzword. Financial targets and vague mission statements just cannot provide the consistent direction that is a prerequisite for winning a global competitive war. This kind of conservatism is usually blamed on the financial markets. The conservative goals they set failed to generate pressure and enthusiasm for competitive innovation or give the organization much useful guidance. Japanese companies win. and perhaps you ll be taken over by a company that can use your resources more creatively Very little in the track record of most large Western companies warrants the confidence of the stock market. Improvements are incremental. creative strategies seldom emerge from the annual planning ritual. Investors aren t hopelessly short-term. with the unstated assumption that if only downward communication were more effective if only middle management would get the message straight the new program would quickly take root. But in studying organizations that lead surrendered. not because they have smarter managers.
focusing its attention long enough to internalize new capabilities this is the real challenge for top management.We believe that top management s caution reflects a lack of confidence in its own ability to involve the entire organization in revitalization as opposed to simply raising financial targets. Only by rising to this challenge will senior managers gain the courage they need to commit themselves and their companies to global leadership. . motivating it to do so. Developing faith in the organization s ability to deliver on tough goals.
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